Introduction: The Historic Duel Between Stock Picking and Index Investing
For several decades, the debate has raged between proponents of stock picking, which involves actively selecting individual stocks, and those of index investing, which aims to replicate the performance of a stock market index. This controversy is particularly intense among French investors, faced with a growing supply of ETFs (Exchange Traded Funds) and a traditional culture of active financial advice.
To settle this debate, it is essential to rely on robust empirical data from recognized studies such as the SPIVA report (S&P Indices Versus Active) and the historical performances of iconic funds and investors. This article offers a detailed, data-driven, and sourced analysis to provide a clear verdict for French investors.
Active Managers’ Performance: A Harsh Reality Over 20 Years
The SPIVA report, published annually by S&P Dow Jones Indices, measures the relative performance of active funds against their benchmark indices. Over the period 2003-2023, the data is unequivocal:
Year
% of US Equity Funds Underperforming the S&P 500
2003
85%
2010
89%
2020
92%
2023
92%
Thus, over 20 years, 92% of active managers in US equities underperformed their benchmark index (SPIVA US Scorecard 2023). This trend is similar in Europe and Japan, with 88% and 90% of active funds underperforming respectively over the same period (SPIVA Europe and Japan 2023).
The main reasons cited are the higher management fees of active funds (on average 1.2% per year versus 0.15% for ETFs), frequent transaction costs, and the intrinsic difficulty of beating an efficient market over the long term (AMF, 2022).
The Exceptions That Prove the Rule: Berkshire Hathaway and Warren Buffett
Despite this overall finding, some famous exceptions exist. Berkshire Hathaway, the holding company led by Warren Buffett, shows an annualized performance of +19.8% over 50 years (1973-2023), compared to +10.2% for the S&P 500 over the same period (Bloomberg).
This exceptional outperformance is attributed to rigorous selection of quality companies, a long-term vision, and strict investment discipline. However, even Buffett acknowledges the difficulty for an average investor to replicate this success.
Why Warren Buffett Still Recommends ETFs
In his 2013 letter to Berkshire Hathaway shareholders, Buffett explicitly advised heirs to allocate 90% of their holdings to ETFs tracking the S&P 500, and 10% to US Treasury bonds. He explains:
“For the vast majority of investors, a simple, low-cost strategy of buying an index fund is the best option.” (2013 Annual Letter)
This recommendation is based on several observations:
The difficulty of beating the market over the long term, even for seasoned professionals.
The low fees of ETFs that maximize net performance.
The immediate diversification offered by an index, reducing specific risk.
Comparative Analysis of Fees and Net Performance
The table below illustrates the impact of fees on an identical gross performance of 10% per year over 20 years, for an initial capital of €100,000:
Investment Type
Annual Fees (%)
Final Capital (€)
Active Fund (1.2% fees)
1.2
563,000
Index ETF (0.15% fees)
0.15
730,000
Source: TradeXora calculations based on compound interest.
The €167,000 difference illustrates the cumulative effect of fees on net performance. Moreover, as seen previously, the gross performance of active funds is often lower than that of indices, further widening the gap.
Specificities of the French Market and Implications for Investors
In France, the popularity of actively managed equity funds remains high, with nearly 70% of equity assets under active management in 2023 (French Asset Management Association - AFG). However, ETFs are growing rapidly, with assets multiplied by 5 over 5 years, reaching €60 billion in 2023 (Bank of France).
French investors must consider several factors:
Favorable taxation of the PEA (Plan d’Épargne en Actions) for European equity ETFs, enhancing the attractiveness of index investing.
The necessity to choose broad and liquid ETFs, for example Lyxor MSCI World or Amundi ETF S&P 500.
Vigilance regarding hidden fees in some active funds marketed through advisory networks.
Conclusion: A Clear Verdict for the French Investor
The factual data is unequivocal: over the long term, the vast majority of active managers underperform their benchmark indices. Exceptions, even exemplary ones like Berkshire Hathaway, remain rare and difficult to replicate.
Furthermore, the lower fees of ETFs and the instant diversification they offer constitute a significant advantage. Even Warren Buffett, an iconic figure of stock picking, recommends individual investors opt for a simple, low-cost index strategy.
For French investors, the most rational and profitable long-term strategy is to favor index investing through ETFs, notably within the PEA framework to optimize taxation.
Active funds can be considered as a minor allocation, to attempt to identify exceptional managers, but this approach must be undertaken with caution and rigorous analysis of fees and past performance.
